3Q24: Results meet INVX, miss market
3Q24 net profit met our estimates but was far below market consensus, plunging 60% QoQ and 57% YoY on weaker demand for paper packaging, especially in China. We expect earnings to recover in 4Q24 on higher holiday demand, with 3Q24 the year’s bottom. China’s stimulus will give a boost in 2025. Maintain Outperform with 2025 TP of Bt38.0, based on 25.9x or -1SD of PE mean.
3Q24 as INVX expected, big miss to consensus. SCGP reported a net profit of Bt577mn in 3Q24 sinking 60.3% QoQ and 56.5% YoY; this was in line with our expectations but far below consensus’ Bt949mn. Removing extra expenses of Bt22mn for FX loss and Bt76mn for the Fajar deal gives a core profit of Bt678mn, down 54.1% QoQ and 48.2% YoY on a 2.5% QoQ drop in sales volume of polymer packaging for medical and labware segments due to low summer demand in Europe and lower demand for paper packaging, especially in China. The drop in demand was coincident with rising raw material (recovered paper) prices, making it difficult to pass on cost increases to customers. Sales volume at Fajar was Bt290mn tons in 3Q24, down from 294mn tons in 2Q24, primarily due to lower exports to China, and ASP slid 0.7% QoQ, resulting in an EBITDA loss of IDR243bn in 3Q24 vs. an EBITDA loss of IDR104bn in 2Q24. The stronger Thai baht hurt exports in the fibrous chain business, particularly dissolving pulp.
Looking better in 4Q24 and 2025. SCGP’s turnaround strategy for Fajar paper is to focus on operational improvements such as optimizing raw material supply and adjusting the energy mix (using coal to replace gas with no increase in carbon emissions) to reduce energy costs. It also plans to grow sales volume through supply chain integration, including M&A of downstream facilities to broaden the value chain and expand the customer portfolio. SCGP has adjusted its target for Fajar’s EBTIDA breakeven to 2Q25, earlier set for 4Q24, with net profit breaking even by 4Q25. SCGP believes Fajar's operations have bottomed and will step back up month by month. Packaging paper demand from China is expected to remain weak in 4Q24, with no real impetus yet from government stimulus, but impact is expected from 1Q25. However, operations will improve in 4Q24 on a decline in raw material costs, particularly in Vietnam and Indonesia, where domestic demand is expected to recover, driven by tourism and exports. The projected cut in global interest rates in 2025 is expected to stimulate spending and investment, positively impacting overall demand. 9M24 core profit accounted for 80% of our full year forecast and we leave our 2024-25 forecasts unchanged.
Action & Recommendation. We recommend taking an opportunity to accumulate when share price drops in response to the poor 3Q24 results. We continue to rate it Outperform for the medium to long term as we expect 2025 core earnings to benefit from China's major economic stimulus package. Our 2025 target price is Bt38/share, based on -1SD of the 3-year PE mean.
Key risks are a continued slow pace in China’s economy and geopolitical unrest raising coal cost. Key ESG risks are energy management, sustainability products, and high greenhouse gas emissions (E).
